Australian clients advised to flee WorldCom

By Garry BarkerThe Age Technology EditorJuly 3 2002

Australian customers of WorldCom are being advised to check the small print in their
contracts, find alternative carriers for vital business traffic and, if conditions on an exit
clause look flaky, consult their lawyers.

Precise figures are unavailable but industry analysts say hundreds of Australian
companies, from small to medium companies up to big corporations, could face disruption
of their communications systems and run some financial risk as the vultures gather for what
meat is left on WorldCom's bones.

"WorldCom will surely not survive," said Julian Hewett, chief executive of industry analyst
firm Ovum. "Most likely it will be forced into Chapter 11 (bankruptcy protection) and that
could lead to a debt-for-equity swap and the banks owning the company."

The telco, once the world's largest international telecommunications carrier and now
brought low by massive accounting irregularities, has set about sacking 17,000 of its
80,000 employees and is within an ace of filing for Chapter 11. That is seen as the
inevitable next step in its brick-like glidepath to oblivion on the auction block.

In Australia the situation is uncertain, although OzEmail, the company's largest local
enterprise, is expected to continue trading and then be sold off to the best bidder.
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"WorldCom covers all capital cities but its
market share is not large compared with
Telstra or Optus. It has extensive
communications infrastructure, switches and
fibre-optic cables, and some large clients here," said Meta Group senior industry analyst
Bjarne Munch. "We are advising customers to seek alternative arrangements for their
business-critical traffic as soon as they can."

The company's core business in Australia covered the corporate market, although some
wholesale deals had been done for traffic on the data backbone, Mr Munch said.

"WorldCom has a large percentage of the Southern Cross cable linking Australia with
Japan and the US. It has also deployed quite a bit of fibre in Australia, between capital
cities, and it bought capacity from Optus and Telstra where it did not have its own cables. It
also deployed fibre loops inside the main capital cities and has been wholesaling some of
that capacity."

Under United States law, Chapter 11 pins American customers into their contracts for a
fixed amount of time, Mr Munch said. "But Australian law is a little more lenient. If the
company goes into liquidation, you are bound by the contract.

"If it goes into receivership, you could exercise the exit clause - if you have one. And we are
advising clients to check their contracts and exit now if they can."

Ian Nathaniel, a corporate litigation lawyer with Melbourne firm Piper Alderman, said that,
under Chapter 11, a "controller" would be appointed to maximise the assets and limit the
liabilities of the parent company in the US. The inevitable inclination would be to sell
OzEmail, Mr Nathaniel said. "In the meantime, it would continue to operate normally."

OzEmail, a wholly owned subsidiary of MCI, a WorldCom company, is Australia's
second-largest Internet service provider, with about 600,000 customers, is assessed as
viable, cash positive and an asset likely now to be sold off to such as SingTel (through
Optus) or Telecom New Zealand (through AAPT).

It is likely that Telstra, Optus, Primus and AAPT will bid for WorldCom's corporate and
business customers.

It is less certain if any of them would be interested in buying the cables and switches.

Mr Nathaniel said these assets and local contracts would be assessed by the US
administrators as individual assets or liabilities. If they were capable of continuing to
operate, they would obviously do so. If they could not, there would be, effectively, a
termination of the contracts with the usual consequences, including the right of clients to
sue for damages over loss of service, he said.

EDS, the world's No. 1 call-centre and infrastructure management company, announced
yesterday that it faced a loss of $US175 million ($A311 million) if WorldCom defaulted on
the $US6.4 billion, 11-year global service contract it has with EDS to manage its computer
systems.

An EDS spokesman in Adelaide said the company was involved with WorldCom
installations in Australia but he was unable to provide details.

EDS manages the whole of the South Australian Government's IT systems, took over
Westpac's mortgage operations late last year and provides services to organisations
ranging from the Australian Tax Office to Holden and Telstra.

As part of the global deal, WorldCom was EDS' preferred communications provider, the
spokesman said, but the relationship was not exclusive.

"EDS is closely monitoring the situation with WorldCom and will obtain alternative
(telecommunications) providers for clients as necessary."